Let the Bull Times Roll! Do You Feel It?

The Stock Market is up over 23% in 35 days. If someone had told you on March 9th as the Dow was trading at 6,547 that ‘you should put your money in the market right now if you want to make 23%,’ what would you have done? Do you remember how horrible March 9th felt? Would you have had that person thrown from your office or would you have done it yourself? But the market is up 23%, and the painful experience of March 9th is becoming milder by the day. I’m reminded of the mid-life crisis t-shirt that reads, “The older I get, the better I was!”

Do you feel it? Are you relieved? Are you feeling more hopeful about the markets, the economy, your financial well-being, and the future? You are, aren’t you? We are. We are feeling better. And the crucially important point is “SO WHAT?!” So we’re feeling better. Are you ready to change your investment posture because you’re feeling better? Do you want to put some more money in stocks now? Our guess is that you’re feeling precisely that way.

One of my most consistent pearls is “If it feels bad, do it!” Emotion will lead you to the wrong investment decision almost every time. Yesterday a very bright client assured us that the market had bottomed in March, that the markets had turned, and that this was a time to generate short-term trading profits. He may be right. He may be right, but no one knows. We will know for sure in a year or so. So what do we do? We analyze data, plumb valuations, and pursue our tried and true investment discipline as doggedly and dispassionately as possible.

We’re not proud of it, but we confess to having feelings too. What we’ve learned over many years is that data are worth a lot more than feelings. Let’s look at the data.

White House Economic Advisor, Larry Summers says the period of “free fall” will end soon. But he warns that even after the worst of the downturn is over, staggering job losses are likely to continue. Fed Chair Bernanke said this morning that there are “signs that the pace of the economy’s decline may be slowing.” But both men say that the decline continues. Producer Prices and Retail Sales figures were both reported lower this morning indicating no inflation and contracting demand. Our conclusion is that while share prices have rallied off a tortuous low in March, the operating environment for most public companies has not changed. Banks have gained some stability from an unimaginable amount of government money, but they are far from out of trouble. Home prices continue to fall, and foreclosures continue to rise. Credit losses on mortgage, home equity, credit card, auto, student loans, commercial real estate and other business loans are heading higher at a dramatic pace. So we remain cautious, buying when valuations are compelling (as they were in early March) and paring positions as recently as yesterday. In successful investing, discipline trumps emotion.

This Bear Market rally might take us back to 9,000, or it may fade back to the low 7,000’s. It may reach the 9,000’s and then make a higher low over the summer around 7,000. We can reasonably argue several reasonable outcomes based on yesterday’s close, but so what? Arguments are no substitute for research, and while price momentum can be mercurial, solid balance sheets will sustain ocean travelers to reach distant shores.

If it feels bad, do it! Great! You’ve read another of Farr’s letters, and you are feeling less sure than when you began reading. Hurray for Farr! Uncertainty is your safest and most reliable investment companion. Uncertainty is the only thing which you can reliably trust. Feelings of certainty in investing are dangerous and should serve as loud warning signals. What should you do? You should always do the same thing: return to your discipline, study the numbers, and make long-term decisions. Don’t let your portfolio values fade as quickly as the short-term noise and daily headlines.

2017 Awards

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